Did you see what just happened? The devaluation of the yuan by China triggered the largest one day drop for that currency in the modern era. This caused other global currencies to crash relative to the U.S. dollar, the price of oil hit a six year low, and stock markets all over the world were rattled. The Dow fell 212 points on Tuesday, and Apple stock plummeted another 5 percent. As we hurtle toward the absolutely critical months of September and October, the unraveling of the global financial system is beginning to accelerate. At this point, it is not going to take very much to push us into a full-blown worldwide financial crisis. The following are 12 signs that indicate that a global financial crash has become even more likely after the events of the past few days…
#1 The devaluation of the yuan on Tuesday took virtually the entire planet by surprise (and not in a good way). The following comes from Reuters…
China’s 2 percent devaluation of the yuan on Tuesday pushed the U.S. dollar higher and hit Wall Street and other global equity markets as it raised fears of a new round of currency wars and fed worries about slowing Chinese economic growth.
#2 One of the big reasons why China devalued the yuan was to try to boost exports. China’s exports declined 8.3 percent in July, and global trade overall is falling at a pace that we haven’t seen since the last recession.
#3 Now that the Chinese have devalued their currency, other nations that rely on exports are indicating that they might do the same thing. If you scan the big financial news sites, it seems like the term “currency war” is now being bandied about quite a bit.
#4 This is the very first time that the 50 day moving average for the Dow has moved below the 200 day moving average in the last four years. This is known as a “death cross”, and it is a very troubling sign. We are just about at the point where all of the most common technical signals that investors typically use to make investment decisions will be screaming “sell”.
#5 The price of oil just closed at a brand new six year low. When the price of oil started to decline back in late 2014, a whole lot of people were proclaiming that this would be a good thing for the U.S. economy. Now we can see just how wrong they were.
At this point, the price of oil has already fallen to a level that is going to be absolutely nightmarish for the global economy if it stays here. Just consider what Jeff Gundlach had to say about this in December…
And back in December 2014, “Bond King” Jeff Gundlach had a serious warning for the world if oil prices got to $40 a barrel.
“I hope it does not go to $40,” Gundlach said in a presentation, “because then something is very, very wrong with the world, not just the economy. The geopolitical consequences could be — to put it bluntly — terrifying.”
#6 This week we learned that OPEC has been pumping more oil than we thought, and it is being projected that this could cause the price of oil to plunge into the 30s…
Increased pumping by OPEC as Chinese demand appears to be slackening could drive oil to the lowest prices since the peak of the financial crisis.
West Texas Intermediate crude futures skidded through the year’s lows and looked set to break into the $30s-per-barrel range after the Organization of the Petroleum Exporting Countries admitted to more pumping and China devalued its currency, sending ripples through global markets.
#7 In a recent article, I explained that the collapse in commodity prices that we are witnessing right now is eerily similar to what we witnessed just before the stock market crash of 2008. On Tuesday, things got even worse for commodities as the price of copper closed at a brand new six year low.
#8 The South American debt crisis of 2015 continues to intensify. Brazil’s government bonds have been downgraded to just one level above junk status, and the approval rating of Brazil’s president has fallen into the single digits.
#9 Just before the financial crisis of 2008, a surging U.S. dollar put an extraordinary amount of stress on emerging markets. Now that is happening again. Emerging market stocks just hit a brand new four year low on Tuesday thanks to the stunt that China just pulled.
#10 Things are not so great in the United States either. The ratio of wholesale inventories to sales in the United States just hit the highest level since the last recession. What that means is that there is a whole lot of stuff sitting in warehouses out there that is waiting to be sold in an economy that is rapidly slowing down.
#11 Speaking of slowing down, the growth of consumer spending in the United States has just plummeted to multi-year lows.
#12 Deep inside, most of us can feel what is coming. According to Gallup, the number of Americans that believe that the economy is getting worse is almost 50 percent higher than the number of Americans that believe that the economy is getting better.
Things are lining up perfectly for a global financial crisis and a major recession beginning in the fall and winter of 2015.
But just because things look like they will happen a certain way does not necessarily mean that they will. All it takes is a single “event” of some sort to change everything.
So what do you believe will happen in the months ahead?
Please feel free to join the discussion by posting a comment below…
The month of August sure has started off with a bang. Tech stocks are crashing, oil is crashing, industrial commodities are crashing, Greek stocks crashed the moment that the Greek stock market reopened for trading, and Chinese stocks continue to crash. At this point we have not seen a broad crash of U.S. stocks yet, but it is important to note that the Dow is already down more than 700 points from the peak in May. If it continues to slide like it has in recent days, it won’t be too long before we will officially reach “correction” territory. Just a few days ago, I described August as a “pivotal month“, and so far that is indeed turning out to be the case.
A full-blown financial crisis has not erupted yet, but we are well on the way. In this article, I want to look at a few of the “crashes” that are already happening…
This is more of a “correction” than a “crash”, but it is very noteworthy because it is happening to one of the most important U.S. stocks of all. The price of Apple stock has already broken through the 200 day moving average, and at this point it is down nearly 11 percent from the peak…
Shares of Apple are down 10.9% from their highest point in a year — which places the stock squarely in what’s considered to be a correction. The unofficial definition of a correction is a 10% or greater drop from a recent high. Shares of Apple hit a 52-week (and all-time) high on $134.54 on April 28.
If you want to see a real crash, just look at what is happening to Twitter. The stock was down close to 6 percent on Monday, and overall it has fallen 58 percent since early last year. The price of Twitter stock has never been lower than it is right now, and many investors are very apprehensive about what comes next…
Twitter shares hit a record low on Monday, closing down nearly 6% to $29.27.
That is 58% below their peak in January 2014.
Shares have fallen to their lowest point since the company went public in November 2014 weighed down by negative comments on growth from company executives that rattled investors. Its previous low was $30.50 in May 2014 as concerns over slowing user growth began to take a toll.
Of course there are tech companies that are in far worse shape than Twitter. For example, just consider what is happening to Yelp. Shares of Yelp recently plummeted 25 percent in a single day, and they are down about 70 percent over the past year.
The Greek government was quite eager to reopen their stock market this week.
Perhaps they should have waited longer.
On Monday, we witnessed the greatest stock bloodbath in Greek history. The following comes from Reuters…
Greece’s stock market closed with heavy losses on Monday after a five-week shutdown brought on by fears that the country was about to be dumped from the euro zone.
Bank shares plummeted 30 percent before loss limits kicked in to stop investors selling any more. The main Athens stock index .ATG ended down 16.2 percent, recovering slightly after plunging nearly 23 percent at the open.
It was the worst daily performance since at least 1985 when modern records began, including a 15 percent fall when Wall Street crashed in 1987.
Things also continue to unravel for “America’s Greece”. On Monday, a U.S. commonwealth territory defaulted on debt for the first time ever…
Puerto Rico’s Government Development Bank announced Monday that it was only able to make a partial payment on its Public Finance Corporation (PFC) debt service due over the weekend.
In response to the non-payment of the full service, Moody’s said it viewed the situation as a default.
“Due to the lack of appropriated funds for this fiscal year the entirety of the PFC payment was not made today (the first business day after the Saturday deadline),” GDB President Melba Acosta-Febo said in a statement. This was a decision that reflects the serious concerns about the Commonwealth’s liquidity in combination with the balance of obligations to our creditors and the equally important obligations to the people of Puerto Rico to ensure the essential services they deserve are maintained.”
As I noted the other day, the Shanghai Composite Index declined 13.4 percent during the month of July. It was the worst month for stocks in China since October 2009.
On Monday, Chinese stocks were down another 1.11 percent. Since closing at 5,166.35 on June 12th, the Shanghai Composite Index has fallen precipitously. As I write this, it is sitting at just 3622.86.
In the months prior to the financial crisis of 2008, the price of oil crashed hard.
Now it is happening again.
In July, the price of oil plunged 21 percent. That was the worst monthly decline that we have seen since October 2008.
And on Monday, the oil crash continued. The following comes from Business Insider…
On Monday in New York, West Texas Intermediate (WTI) crude fell more than 4% and slipped below $45 per barrel, a level it hasn’t touched since March.
Brent crude oil, the international benchmark that joined WTI in a bear market last week, dropped more than 4%, below $50 per barrel for the first time since January.
In recent weeks, I have been writing over and over about industrial commodities. This is yet another striking similarity to the last financial crisis. In 2008, they started crashing before stocks did, and now it is happening again…
We see the Bloomberg Commodities index now at a 13-year low. Copper is down 28 percent for the year, tin is down 30 percent, and nickel is down 44 percent.
This is a giant red flag that indicates that we are plunging into a deflationary cycle. When global economic activity slows down, so does demand for industrial commodities. I don’t understand why more people can’t see this.
I have been warning that a deflationary downturn was coming for a very long time, and so have others. For instance, just consider the following excerpt from a recent article by Nicole Foss…
Our consistent theme here at the Automatic Earth since its inception has been that we are facing a very powerful deflationary depression, following on from the bursting of an epic financial bubble. What we have witnessed in our three decades of expansion and inflation is nothing short of a monetary supernova, and that period has been the just culmination of a much larger upward trend going back many decades at least. We have lived through a credit hyper-expansion for the record books, with an unprecedented generation of excess claims to underlying real wealth. In doing so we have created the largest financial departure from reality in human history.
Bubbles are not new – humanity has experienced them periodically going all the way back to antiquity – but the novel aspect of this one, apart from its scale, is its occurrence at a point when we have reached or are reaching so many limits on a global scale. The retrenchment we are about to experience as this bubble bursts is also set to be unprecedented, given that the scale of a bust is predictably proportionate to the scale of the excesses during the boom that precedes it. We have built an incredibly complex economic system, but despite its robust appearance it is over-extended, brittle and fragile after decades of fueling its continued expansion by feeding on its own substance.
Things continue to line up in textbook fashion for a major financial crisis during the fall and winter.
I hope that you are prepared for what comes next.
When financial markets crash, they do not do so in a vacuum. There are always patterns, signs and indicators that tell us that something is about to happen. In this article, I am going to share with you four patterns that are happening right now that also happened just prior to the great financial crisis of 2008. These four signs are very strong evidence that a deflationary financial collapse is right around the corner. Instead of the hyperinflationary crisis that so many have warned about, what we are about to experience is a collapse in asset prices, a massive credit crunch and a brief period of absolutely crippling deflation. The response by national governments and global central banks to this horrific financial crisis will cause tremendous inflation down the road, but that comes later. What comes first is a crisis that will initially look a lot like 2008, but will ultimately prove to be much worse. The following are 4 things that are happening right now that indicate that a deflationary financial collapse is imminent…
#1 Commodities Are Crashing
In mid-2008, just before the U.S. stock market crashed in the fall, commodities started crashing hard. Well, now it is happening again. In fact, the Bloomberg Commodity Index just hit a 13 year low, which means that it is already lower than it was at any point during the last financial crisis…
#2 Oil Is Crashing
On Monday, the price of oil dipped back below $50 a barrel. This has surprised many analysts, because a lot of them thought that the price of oil would start to rebound by now.
In early 2014, the price of a barrel of oil was sitting above $100 a barrel and the future of the industry looked very bright. Since that time, the price of oil has fallen by more than 50 percent.
There is only one other time in all of history when the price of oil has fallen by more than $50 a barrel in such a short period of time. That was in 2008, just before the great financial crisis that erupted later that year. In the chart posted below, you can see how similar that last oil crash was to what we are experiencing right now…
#3 Gold Is Crashing
Most people don’t remember that the price of gold took a very serious tumble in the run up to the financial crisis of 2008. In early 2008, the price of gold almost reached $1000 an ounce, but by October it had fallen to nearly $700 an ounce. Of course once the stock market finally crashed it ultimately propelled gold to unprecedented heights, but what we are concerned about for this article is what happens before a crisis arrives.
Just like in 2008, the price of gold has been hit hard in recent months. And on Monday, the price of gold absolutely got slammed. The following comes from USA Today…
The yellow metal has tumbled to a five-year low amid a combination of diminishing investor fears related to foreign headwinds in Greece and China, and stronger growth in the U.S. which is leading to a stronger dollar and coming interest rate hikes from the Federal Reserve. Investors have been dumping shares of gold-related investments as other bearish signs, such as less demand from China and the breaking of key price support levels, add up.
Earlier today, an ounce of gold fell below $1,100 an ounce to $1,080, its lowest level since February 2010. Gold peaked around $1,900 an ounce back in 2011.
For years, I have been telling people that we were going to see wild swings in the prices of gold and silver.
And to be honest, the party is just getting started. Personally, I particularly love silver for the long-term. But you have got to be able to handle the roller coaster ride if you are going to get into precious metals. It is not for the faint of heart.
#4 The U.S. Dollar Index Is Surging
Before the U.S. stock market crashed in the fall of 2008, the U.S. dollar went on a very impressive run. This is something that you can see in the chart posted below. Now, the U.S. dollar is experiencing a similar rise. For a while there it looked like the rally might fizzle out, but in recent days the dollar has started to skyrocket once again. That may sound like good news to most Americans, but the truth is that a strong dollar is highly deflationary for the global financial system as a whole for a variety of reasons. So just like in 2008, this is not the kind of chart that we should want to see…
If a 2008-style financial crisis was imminent, these are the kinds of things that we would expect to see happen. And of course these are not the only signs that are pointing to big problems in our immediate future. For example, the last time there was a major stock market crash in China, it came just before the great U.S. stock market crash in the fall of 2008. This is something that I covered in my previous article entitled “Guess What Happened The Last Time The Chinese Stock Market Crashed Like This?”
As an attorney, I was trained to follow the evidence and to only come to conclusions that were warranted by the facts. And right now, it seems abundantly clear that things are lining up in textbook fashion for another major financial crisis.
But even though what is happening right in front of our eyes is so similar to what happened back in 2008, most people do not see it.
And the reason why they do not see it is because they do not want to see it.
Just like with most things in life, most people end up believing exactly what they want to believe.
Yes, there is a segment of the population that are actually honest truth seekers. If you have felt drawn to this website, you are probably one of them. But overall, most people in our society are far more concerned with making themselves happy than they are about pursuing the truth.
So even though the signs are obvious, most people will never see what is coming in advance.
I hope that does not happen to you.
When an economic crisis is coming, there are usually certain indicators that appear in advance. For example, commodity prices usually start to plunge before a recession begins. And as you can see from the Bloomberg Commodity Index which you can find right here, this has already been happening. In addition, I have previously written about how the U.S. dollar went on a great run just before the financial collapse of 2008. This is something that has also been happening over the past few months. Some people would have you believe that nobody can anticipate the next great economic downturn and that to try to do so is just an exercise in “guesswork”. But that is not the case at all. We can look back over history and see patterns that keep repeating. And a lot of the exact same patterns that happened just before previous stock market crashes are happening again right now.
For example, let’s talk about the price of oil. There are only two times in history when the price of oil has fallen by more than 50 dollars in a six month time period. One was just before the financial crisis in 2008, and the other has just happened…
As a result of crashing oil prices, we are witnessing oil rigs shut down in the United States at a blistering pace. In fact, almost half of all oil rigs in the U.S. have already shut down. The following commentary and chart come from Wolf Richter…
In the latest week, drillers idled another 41 oil rigs, according to Baker Hughes. Only 825 rigs were still active, down 48.7% from October. In the 23 weeks since, drillers have idled 784 oil rigs, the steepest, deepest cliff-dive in the history of the data:
We are looking at a full-blown fracking bust, and this bust is already having a dramatic impact on the economies of states that are heavily dependent on the energy industry.
For example, just check out the disturbing number that just came out of Texas…
The crash in oil prices is hammering the Texas economy.
The latest manufacturing outlook index from the Dallas Fed plunged again in March, to -17.4 from -11.2 in February, indicating deteriorating business conditions in the state.
But this pain is going to be felt far beyond Texas. In recent years, Wall Street banks have made a massive amount of money packaging up energy industry loans, bonds, etc. and selling them off to investors.
If that sounds similar to the kind of behavior that preceded the subprime mortgage meltdown, that is because it is.
Now those loans, bonds, etc. are going bad as the fracking bust intensifies, and whoever is left holding all of this worthless paper at the end of the day is going to lose an extraordinary amount of money. Here is more from Wolf Richter…
It suited Wall Street just fine: according to Dealogic, banks extracted $31 billion in fees from the US oil and gas industry and its investors over the past five years by handling IPOs, spin-offs, “leveraged-loan” transactions, the sale of bonds and junk bonds, and M&A.
That’s $6 billion in fees per year! Over the last four years, these banks made over $4 billion in fees on just “leveraged loans.” These loans to over-indebted, junk-rated companies soared from about $40 billion in 2009 to $210 billion in 2014 before it came to a screeching halt.
For Wall Street it doesn’t matter what happens to these junk bonds and leveraged loans after they’ve been moved on to mutual funds where they can decompose sight-unseen. And it doesn’t matter to Wall Street what happens to leverage loans after they’ve been repackaged into highly rated Collateralized Loan Obligations that are then sold to others.
At the same time, we are also witnessing a slowdown in global trade. This usually happens when economic conditions are about to turn sour, and that is why it is so alarming that the total volume of global trade in January was down 1.4 percent from December. According to Tyler Durden of Zero Hedge, that was the largest drop since 2011…
Presenting the latest data from the CPB Netherlands Bureau for Economic Policy Analysis, according to which in January world trade by volume dropped by a whopping 1.4% from December: the biggest drop since 2011!
We are seeing some troubling signs in the U.S. as well.
I shared the following chart in a previous article, but it bears repeating. It comes from Charles Hugh Smith, and it shows that new orders for consumer goods are falling at a rate not seen since the last recession…
Well, what about the stock market? It was up more than 200 points on Monday. Isn’t that good news?
Yes, but the euphoria on Wall Street will not last for long.
When corporate earnings per share either start flattening out or start to decline, that is a huge red flag. We saw this just prior to the stock market crash of 2008, and it is happening again right now. The following commentary and chart come from Phoenix Capital Research…
Take a look at the below chart showing current stock levels and changes in forward Earnings Per Share (EPS). Note, in particular how divergences between EPS and stocks tend to play out (hint look at 2007-2008).
We all know what came next.
And guess what?
According to CNBC, a lot of the “smart money” is pulling their money out of the stock market right now while the getting is good…
Recent market volatility has sent stock market investors rushing for the exits and into cash.
Outflows from equity-based funds in 2015 have reached their highest level since 2009, thanks to a seesaw market that has come under pressure from weak economic data, a stronger dollar and the the prospect of monetary tightening.
Funds that invest in stocks have seen $44 billion in outflows, or redemptions, year to date, according to Bank of America Merrill Lynch. Equity funds have seen outflows in five of the last six weeks, including $6.1 billion in just the last week.
It doesn’t matter if you are a millionaire “on paper” today.
What matters is if the money is going to be there when you really need it.
At the moment, a whole lot of people have been lulled into a false sense of complacency by the soaring stock market and by the bubble of false economic stability that we have been enjoying.
But under the surface, there is a whole lot of turmoil going on.
Those that are looking for the signs are going to see the next crisis approaching well in advance.
Those that are not are going to get absolutely blindsided by what is coming.
Don’t let that happen to you.
This is just the beginning of the oil crisis. Over the past couple of weeks, the price of U.S. oil has rallied back above 50 dollars a barrel. In fact, as I write this, it is sitting at $52.93. But this rally will not last. In fact, analysts at the big banks are warning that we could soon see U.S. oil hit the $20 mark. The reason for this is that the production of oil globally is still way above the current level of demand. Things have gotten so bad that millions of barrels of oil are being stored at sea as companies wait for the price of oil to go back up. But the price is not going to go back up any time soon. Even though rigs are being shut down in the United States at the fastest pace since the last financial crisis, oil production continues to go up. In fact, last week more oil was produced in the U.S. than at any time since the 1970s. This is really bad news for the economy, because the price of oil is already at a catastrophically low level for the global financial system. If the price of oil stays at this level for the rest of the year, we are going to see a whole bunch of energy companies fail, billions of dollars of debt issued by energy companies could go bad, and trillions of dollars of derivatives related to the energy industry could implode. In other words, this is a recipe for a financial meltdown, and the longer the price of oil stays at this level (or lower), the more damage it is going to do.
The way things stand, there is simply just way too much oil sitting out there. And anyone that has taken Economics 101 knows that when supply far exceeds demand, prices go down…
Oil prices have gotten crushed for the last six months. The extent to which that was caused by an excess of supply or by a slowdown in demand has big implications for where prices will head next. People wishing for a big rebound may not want to read farther.
Goldman Sachs released an intriguing analysis on Wednesday that shows what many already suspected: The big culprit in the oil crash has been an abundance of oil flooding the market. A massive supply shock in the second half of last year accounted for most of the decline. In December and January, slowing demand contributed to the continued sell-off.
At this point so much oil has already been stored up that companies are running out of places to put in all. Just consider the words of Goldman Sachs executive Gary Cohn…
“I think the oil market is trying to figure out an equilibrium price. The danger here, as we try and find an equilibrium price, at some point we may end up in a situation where storage capacity gets very, very limited. We may have too much physical oil for the available storage in certain locations. And it may be a locational issue.”
“And you may just see lots of oil in certain locations around the world where oil will have to price to such a cheap discount vis-a-vis the forward price that you make second tier, and third tier and fourth tier storage available.”
[…] “You could see the price fall relatively quickly to make that storage work in the market.”
The market for oil has fundamentally changed, and that means that the price of oil is not going to go back to where it used to be. In fact, Goldman Sachs economist Sven Jari Stehn says that we are probably heading for permanently lower prices…
The big take-away: “[T]he decline in oil has been driven by an oversupplied global oil market,” wrote Goldman economist Sven Jari Stehn. As a result, “the new equilibrium price of oil will likely be much lower than over the past decade.”
So how low could prices ultimately go?
As I mentioned above, some analysts are throwing around $20 as a target number…
The recent surge in oil prices is just a “head-fake,” and oil as cheap as $20 a barrel may soon be on the way, Citigroup said in a report on Monday as it lowered its forecast for crude.
Despite global declines in spending that have driven up oil prices in recent weeks, oil production in the U.S. is still rising, wrote Edward Morse, Citigroup’s global head of commodity research. Brazil and Russia are pumping oil at record levels, and Saudi Arabia, Iraq and Iran have been fighting to maintain their market share by cutting prices to Asia. The market is oversupplied, and storage tanks are topping out.
A pullback in production isn’t likely until the third quarter, Morse said. In the meantime, West Texas Intermediate Crude, which currently trades at around $52 a barrel, could fall to the $20 range “for a while,” according to the report.
Keep in mind that the price of oil is already low enough to be a total nightmare for the global financial system if it stays here for the rest of 2015.
If we go down to $20 and stay there, a global financial meltdown is virtually guaranteed.
Meanwhile, the “fracking boom” in the United States that generated so many jobs, so much investment and so much economic activity is now turning into a “fracking bust”…
The fracking-for-oil boom started in 2005, collapsed by 60% during the Financial Crisis when money ran out, but got going in earnest after the Fed had begun spreading its newly created money around the land. From the trough in May 2009 to its peak in October 2014, rigs drilling for oil soared from 180 to 1,609: multiplied by a factor of 9 in five years! And oil production soared, to reach 9.2 million barrels a day in January.
It was a great run, but now it is over.
In the months ahead, the trickle of good paying oil industry jobs that are being lost right now is going to turn into a flood.
And this boom was funded with lots and lots of really cheap money from Wall Street. I like how Wolf Richter described this in a recent article…
That’s what real booms look like. They’re fed by limitless low-cost money – exuberant investors that buy the riskiest IPOs, junk bonds, leveraged loans, and CLOs usually indirectly without knowing it via their bond funds, stock funds, leveraged-loan funds, by being part of a public pension system that invests in private equity firms that invest in the boom…. You get the idea.
As all of this bad paper unwinds, a lot of people are going to lose an extraordinary amount of money.
Don’t get caught with your pants down. You will want your money to be well away from the energy industry long before this thing collapses.
And of course in so many ways what we are facing right now if very reminiscent of 2008. So many of the same patterns that have played out just prior to previous financial crashes are happening once again. Right now, oil rigs are shutting down at a pace that is almost unprecedented. The only time in recent memory that we have seen anything like this was just before the financial crisis in the fall of 2008. Here is more from Wolf Richter…
In the latest reporting week, drillers idled another 84 rigs, the second biggest weekly cut ever, after idling 83 and 94 rigs in the two prior weeks. Only 1056 rigs are still drilling for oil, down 443 for the seven reporting weeks so far this year and down 553 – or 34%! – from the peak in October.
Never before has the rig count plunged this fast this far:
What if the fracking bust, on a percentage basis, does what it did during the Financial Crisis when the oil rig count collapsed by 60% from peak to trough? It would take the rig count down to 642!
But even though rigs are shutting down like crazy, U.S. production of oil has continued to rise…
Rig counts have long been used to help predict future oil and gas production. In the past week drillers idled 98 rigs, marking the 10th consecutive decline. The total U.S. rig count is down 30 percent since October, an unprecedented retreat. The theory goes that when oil rigs decline, fewer wells are drilled, less new oil is discovered, and oil production slows.
But production isn’t slowing yet. In fact, last week the U.S. pumped more crude than at any time since the 1970s. “The headline U.S. oil rig count offers little insight into the outlook for U.S. oil production growth,” Goldman Sachs analyst Damien Courvalin wrote in a Feb. 10 report.
Look, it should be obvious to anyone with even a basic knowledge of economics that the stage is being set for a massive financial meltdown.
This is just the kind of thing that can plunge us into a deflationary depression. And when you combine this with the ongoing problems in Europe and in Asia, it is easy to see that a “perfect storm” is brewing on the horizon.
Sadly, a lot of people out there will choose not to believe until the day the crisis arrives.
By then, it will be too late to do anything about it.
Are we on the verge of a major worldwide economic downturn? Well, if recent warnings from prominent bankers all over the world are to be believed, that may be precisely what we are facing in the months ahead. As you will read about below, the big banks are warning that the price of oil could soon drop as low as 20 dollars a barrel, that a Greek exit from the eurozone could push the EUR/USD down to 0.90, and that the global economy could shrink by more than 2 trillion dollars in 2015. Most of the time, very few people ever actually read the things that the big banks write for their clients. But in recent months, a lot of these bankers are issuing such ominous warnings that you would think that they have started to write for The Economic Collapse Blog. Of course we have seen this happen before. Just before the financial crisis of 2008, a lot of people at the big banks started to get spooked, and now we are beginning to see an atmosphere of fear spread on Wall Street once again. Nobody is quite sure what is going to happen next, but an increasing number of experts are starting to agree that it won’t be good.
Let’s start with oil. Over the past couple of weeks, we have seen a nice rally for the price of oil. It has bounced back into the low 50s, which is still a catastrophically low level, but it has many hoping for a rebound to a range that will be healthy for the global economy.
Unfortunately, many of the experts at the big banks are now anticipating that the exact opposite will happen instead. For example, Citibank says that we could see the price of oil go as low as 20 dollars this year…
The recent rally in crude prices looks more like a head-fake than a sustainable turning point — The drop in US rig count, continuing cuts in upstream capex, the reading of technical charts, and investor short position-covering sustained the end-January 8.1% jump in Brent and 5.8% jump in WTI into the first week of February.
Short-term market factors are more bearish, pointing to more price pressure for the next couple of months and beyond — Not only is the market oversupplied, but the consequent inventory build looks likely to continue toward storage tank tops. As on-land storage fills and covers the carry of the monthly spreads at ~$0.75/bbl, the forward curve has to steepen to accommodate a monthly carry closer to $1.20, putting downward pressure on prompt prices. As floating storage reaches its limits, there should be downward price pressure to shut in production.
The oil market should bottom sometime between the end of Q1 and beginning of Q2 at a significantly lower price level in the $40 range — after which markets should start to balance, first with an end to inventory builds and later on with a period of sustained inventory draws. It’s impossible to call a bottom point, which could, as a result of oversupply and the economics of storage, fall well below $40 a barrel for WTI, perhaps as low as the $20 range for a while.
Even though rigs are shutting down at a pace that we have not seen since the last recession, overall global supply still significantly exceeds overall global demand. Barclays analyst Michael Cohen recently told CNBC that at this point the total amount of excess supply is still in the neighborhood of a million barrels per day…
“What we saw in the last couple weeks is rig count falling pretty precipitously by about 80 or 90 rigs per week, but we think there are more important things to be focused on and that rig count doesn’t tell the whole story.”
He expects to see some weakness going into the shoulder season for demand. In addition, there is an excess supply of about a million barrels of oil a day, he said.
And the truth is that many firms simply cannot afford to shut down their rigs. Many are leveraged to the hilt and are really struggling just to service their debt payments. They have to keep pumping so that they can have revenue to meet their financial obligations. The following comes directly from the Bank for International Settlements…
“Against this background of high debt, a fall in the price of oil weakens the balance sheets of producers and tightens credit conditions, potentially exacerbating the price drop as a result of sales of oil assets, for example, more production is sold forward,” BIS said.
“Second, in flow terms, a lower price of oil reduces cash flows and increases the risk of liquidity shortfalls in which firms are unable to meet interest payments. Debt service requirements may induce continued physical production of oil to maintain cash flows, delaying the reduction in supply in the market.”
In the end, a lot of these energy companies are going to go belly up if the price of oil does not rise significantly this year. And any financial institutions that are exposed to the debt of these companies or to energy derivatives will likely be in a great deal of distress as well.
Meanwhile, the overall global economy continues to slow down.
On Monday, we learned that the Baltic Dry Index has dropped to the lowest level ever. Not even during the darkest depths of the last recession did it drop this low.
And there are some at the big banks that are warning that this might just be the beginning. For instance, David Kostin of Goldman Sachs is projecting that sales growth for S&P 500 companies will be zero percent for all of 2015…
“Consensus now forecasts 0% S&P 500 sales growth in 2015 following a 5% cut in revenue forecasts since October. Low oil prices along with FX headwinds and pension charges have weighed on 4Q EPS results and expectations for 2015.”
Others are even more pessimistic than that. According to Bank of America, the global economy will actually shrink by 2.3 trillion dollars in 2015.
One thing that could greatly accelerate our economic problems is the crisis in Greece. If there is no compromise and a new Greek debt deal is not reached, there is a very real possibility that Greece could leave the eurozone.
If Greece does leave the eurozone, the continued existence of the monetary union will be thrown into doubt and the euro will utterly collapse.
Of course I am not the only one saying these things. Analysts at Morgan Stanley are even projecting that the EUR/USD could plummet to 0.90 if there is a “Grexit”…
The Greek Prime Minister has reaffirmed his government’s rejection of the country’s international bailout programme two days before an emergency meeting with the euro area’s finance ministers on Wednesday. His declaration suggested increasing minimum wages, restoring the income tax-free threshold and halting infrastructure privatisations. Should Greece stay firm on its current anti-bailout course and with the ECB not accepting Greek T-bills as collateral, the position of ex-Fed Chairman Greenspan will gain increasing credibility. He forecast the eurozone to break as private investors will withdraw from providing short-term funding to Greece. Greece leaving the currency union would convert the union into a club of fixed exchange rates, a type of ERM III, leading to further fragmentation. Greek Fin Min Varoufakis said the euro will collapse if Greece exits, calling Italian debt unsustainable. Markets may gain the impression that Greece may not opt for a compromise, instead opting for an all or nothing approach when negotiating on Wednesday. It seems the risk premium of Greece leaving EMU is rising. Our scenario analysis suggests a Greek exit taking EURUSD down to 0.90.
If that happens, we could see a massive implosion of the 26 trillion dollars in derivatives that are directly tied to the value of the euro.
We are moving into a time of great peril for global financial markets, and there are a whole host of signs that we are slowly heading into another major global economic crisis.
So don’t be fooled by all of the happy talk in the mainstream media. They did not see the last crisis coming either.